Welcome to Brinker International’s first quarter fiscal ’09 earnings call which is also being broadcast live over the Internet. Today with us from management are Doug Brooks, Chairman and Chief Executive Officer, Chuck Sonsteby, Chief Financial Officer, and Guy Constant, Senior Vice President of Finance.

Before turning over the call, let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments and in our responses to your questions certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties that could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning’s press release and the company’s filings with the SEC. In addition, Brinker disclaims any intent or obligation to update these forward-looking statements.

On the call we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight to the company’s ongoing operations. Reconciliations are provided in the tables in the earnings release and on the Brinker website under the financial section of the Investor tab for your review.

On today’s call Doug will begin with an update on the company’s long-term areas of focus. He will turn the call over to Chuck to provide a financial recap of the quarter’s operating results. Following these comments we will open up the call to your questions. Now I’ll turn the call over to Doug.

Douglas H. Brooks

We’re speaking to you this morning in the midst of one of the toughest operating environments in our company history. Pressures from fiscal year 2008 continued into the first quarter of fiscal 2009 as reflected in our disappointing sales and earnings results for the quarter.

The challenging economic environment including the volatile financial market, housing crisis and high energy prices continues to put significant pressure on consumer spending here in the US and overseas. Along with the many pressures on consumers we’re also enduring the rising costs of commodities and the fixed costs of operating restaurants which are much more difficult to cover in this current environment.

While we have seen some relief recently from rising fuel costs, consumers continue to be conservative in their discretionary spending which has a negative impact on Brinker brands and the restaurant industry as a whole. Our traffic trends reflect a guest choice to dine out less often, prepare meals at home or trade down to quick service options. These choices have also affected check averages as guests scale back on meal add-ons such as specialty drinks, appetizers and desserts.

Yes, outside the United States continued to respond very favorably to Brinker brands but in many countries they are also beginning to feel the same pressures of rising fuel costs and the financial market volatility. As our international presence continues to grow, we can leverage our earnings from the pressures in the US to proactively address potential issues overseas.

As we continue to weather the many challenges in our industry, we are confident though in the long-term viability of Brinker brands. We’re bolstered by the fact that our cash flow remains strong, our commitment to hospitality and guest satisfaction is solid, and we are focused on five strategic priorities that will strengthen Brinker brands in the short term and accelerate our profitability when the economic conditions inevitably improve.

We’re closely monitoring the current business environment and are prepared to make choices in pacing the implementation of our initiatives. Chuck will discuss in more detail our revised capital expenditures for fiscal 2009.

You may recall that our five areas of focus are designed to build on the long-term financial health of the company and to grow our base business by engaging in delighting our guests, differentiating Brinker brands from the competition, reducing costs associated with managing our restaurants and establishing a strong presence in key markets around the world. I will touch on the highlights of these five areas of focus this morning.

Our most active area is our discipline in aggressive international expansion of Brinker brands in key markets around the world. Ina move to redefine our company’s development strategy we’re continuing to shift our focus to increased franchise development both domestically and are continuing our efforts to accelerate franchise growth internationally. Our growth will be driven by cultivating relationships with equity investors, joint venture partners and franchisees interested in expanding their business interests through the Brinker portfolio.

Our stated goal for international growth has been 300 restaurants outside the United States by the end of calendar year 2010. As this goal originally included development of the Macaroni Grill brand, we’ll update and restate our goal once the sale of the brand is completed.

While many restaurant companies have just one brand to offer to franchisees, Brinker can point to the strength of three diverse brands.

In fact in recent years many of our well-established Chili’s franchisees have signed new agreements to develop one of our other brands. For example, in the first quarter our franchise partners opened two new On The Border restaurants in Saudi Arabia and South Korea. We also signed a new development deal with our long-term partner in Puerto Rico for six new On The Border restaurants. In addition, our global development team opened the very first international Maggiano’s Italian Restaurant, an international brand extension of Maggiano’s Little Italy in Belfast, North Ireland.

Emerging markets such as China, Brazil and India present tremendous opportunity for Brinker. These countries’ growing middle class is highly attracted to the full service and comprehensive menus offered by our casual dining brands. To capitalize on this interest and to establish a leading presence in growing markets, Brinker will continue to pursue new and expanded relationships with potential investors in these regions.

In fact, in the fourth quarter of fiscal 2008 we signed two significant agreements with franchise partners which will open our first restaurants in India by the end of the fiscal year. A subsidiary of our long-time Middle East franchise partner Jawad Business Group has agreed to build 15 restaurants in India over the next four years. Stellar Concepts, a new franchisee, has also agreed to build 10 restaurants in North and East India over the next seven years.

Our growing percentage of franchise operations both domestically and internationally enable Brinker to improve margins as royalty payments flow directly through the bottom line. Additionally, returns in many markets are superior to the US due to cost advantages in terms of food, facilities and labor.

With growing economic pressures in the US, international expansion allows further diversification of our portfolio enabling Brinker to build strength in a variety of markets and economic conditions. For example, our significant presence in the Middle East continues to deliver impressive results due to a robust economy. Operations in the Middle East experienced a 14.5% increase in comparable restaurant sales driven by the economies of our franchisees’ scale to leverage brand awareness in the region as well as a highly favorable macroeconomic environment.

Brinker is the largest player in the casual dining segment in both the Middle East and Mexico which enables our franchisees to harness their broader resources through participation in marketing coalitions to drive sales. Capitalizing on the strength of this coalition, the franchisees collectively invest in advertising and public relations opportunities that build guest awareness and drive traffic to the restaurants. Using an integrative media campaign combining a number of outlets, partners in both the Middle East and in Mexico experienced significant lifts in sales during the first quarter.

Brinker will continue to leverage its strength in casual dining outside the US and our franchisees are building more restaurants internationally than ever before. During the first quarter Brinker opened 10 new international franchise restaurants in the thriving markets of Bahrain, Saudi Arabia, Mexico, Egypt, South Korea and Qatar. As for company-owned international development, Brinker also opened our first Chili’s in Northern Ireland right next to the Maggiano’s I mentioned earlier. Just a few weeks ago we entered our 25th country with the opening of our first Chili’s in Lisbon, Portugal.

These new locations bring our international presence to 189 restaurants outside the United States.

While we aggressively pursue our goals for international expansion, we also grew strategically in key domestic markets with the help of our franchise partners. During the first quarter of fiscal 2009 we built 21 new domestic restaurants, 14 of which are new franchise locations and seven are company-owned.

Another top priority remains creating a culture of hospitality that establishes emotional connections with our guests and engages our team members. We believe that providing a consistently warm, welcoming and engaging experience differentiates Brinker brands from all others in the industry. As guests limit their frequency of dining out, they also become more selective in their choice of restaurants. With continued pressure on the guest wallet, Brinker brands offers significant value in terms of food, atmosphere and service.

By investing in comprehensive team member training, recognition and guest measurement programs Brinker brands are well positioned to become preferred destinations for casual dining. As evidenced by the feedback gathered in our guest satisfaction surveys, we are gaining significant traction in this area and are focused on delivering consistently outstanding dining experiences for our guests.

An important component of our hospitality promise is to give back to the communities we serve. During the first quarter Chili’s conducted its fifth annual Creative Pepper to Fight Childhood Cancer campaign raising more than $6 million for St. Jude Children’s Research Hospital. To date the brand has raised more than $25 million as part of its 10-year $50 million pledge to the hospital.

We’re also proud to report that in September Chili’s was honored for its partnership with St. Jude with the National Restaurants Association’s Restaurant Neighbor Award. On behalf of Chili’s President Todd Diener and the entire Chili’s leadership team, we thank our guests, our franchisees, our team members and our supplier partners for your generosity and creativity for a great cause.

Throughout the month of October On The Border will raise funds within its restaurants to benefit Susan G. Komen For the Cure during its second annual Fiesta For the Cure campaign. Around the country team members will also participate in Komen Race for the Cure and Breast Cancer 3-day events effectively walking the talk in their own communities for this important cause.

An ongoing area of focus for Brinker and its brands is food and beverage excellence. We’re going to continue to deliver against high standards of execution of food and beverage quality within our restaurants. Our brands are also improving core menu execution by increasing training and recertification of managers and heart of house team members and by tightening product specs from our supplier partners. Additionally, periodic reviews of recipes, ingredients and processes for signature menu items help our restaurant teams ensure consistent execution and quality across the entire system.

We will also continue to build on core menu favorites by creating new flavors and value offerings that not only please the palate but also give our guests new reasons to dine with us more often.

For example, Chili’s introduced a highly successful extension of an existing core menu offering with its Honey Chipotle Chicken Crisper promotion during the first quarter of fiscal 2008 and it’s further extending that offering this quarter with the introduction of Crispy Chicken Tacos, Buffalo Chicken Crisper Bites and three new bowl flavors of Chicken Crispers: Sweet chili glazed, honey barbeque and the habanera.

We also recently extended our legendary Big Mouth burger line into the successful Smokehouse Bacon Burger promotion in the third quarter of fiscal 2008 soon followed by what is now the brand’s best selling burger on the menu, the Big Mouth bites.

On The Border serves the world’s favorite Mexican food and is building on the success of core menu favorites with new innovations in tacos and enchiladas. In the first quarter the brand successfully introduced three new grilled enchiladas featuring Pepper Jack Chicken, Avocado with Red Chili Pesto and Smoky Beef Brisket. These items quickly became leading sellers on the menu.

Guests clearly appreciate that innovation and this summer On The Border was named a platinum winner in the Mexican segment of 2008 Consumer’s Choice in Change Award by Restaurants & Institutions magazine.

Maggiano’s continues to charm guests with its made from scratch menu items created by our talented executive chefs. In September the brand celebrated the Italian Harvest with new specials and line pairings. Guests responded favorably to offerings such as the prosciutto Wrapped Shrimp appetizer as well as featured entrees such as Chianti Beef Stew and the best-selling Halibut [Muree] paired with wines from Southern Italy.

Macaroni Grill offers the fresh translation of Italian with unique twists on traditional dishes. During the quarter the brand featured Sizzling Sensations while introducing innovative new menu items such as Chianti Steak, Tapenade Trio and Pinot Grigio Chicken. New value options such as the Roma lunch combos and the Chef’s Trio dinner offer guests a generous meal at great values. The brand’s beverage innovation includes a new and improved Bellini made with peach nectar with a splash of champagne.

Brinker’s also focused on offering relevant restaurant atmospheres that reflect the vibrant personalities of our brands and offer a warm and welcoming environment for our guests.

The current reimage program at Chili’s has demonstrated progress in driving incremental traffic and bringing guests back to the brand. Since the start of the program we have reimaged 95 Chili’s restaurants and results have maintained an average mid-single-digit growth in guest counts. We will continue to analyze the success of the reimage program and follow a disciplined process to review continued investment in the reimage program as the business climate and economic conditions allow.

Our final area of focus is to transform the casual dining experience in terms of pace and convenience for the guest. Using a combination of hospitality, process improvements and cutting edge technologies, Brinker brands are pursuing the delivery of dining experience that are tailored to our guests’ individual pacing preferences. Whether they’re short on time or want to linger over a celebratory meal, we want to deliver an experience like none other in the industry.

Our activities around this area focus consist of tests and analyses of several inter-related initiatives in both the front and back of the house. We’re encouraged by our learnings to date and see significant potential in designing a fully integrated restaurant technology system. Moving forward we’ll continue to analyze enabling technologies and process improvements being conservative in our capital expenditures as dictated by the current business climate.

Although Brinker and the entire restaurant industry remains challenged by a highly competitive environment, increased costs and an uncertain economy we are more focused and motivated than ever to produce positive results for our shareholders. We will continue to optimize the use of capital by being disciplined about new restaurant development, closing underperforming locations, selling company restaurants to strong franchisees, reinvesting in the four walls, and optimizing our capital structure. Just as important are our efforts to run the business efficiently by managing operating expenses including G&A.

Our top priority as an organization remains increasing profitable traffic over time. While we’re encouraged by the early progress and traction we’ve experienced with our strategic priorities, we also realize that the many external pressures are negatively impacting this progress. Through concentrated actions aligned with our five areas of focus, we’re confident that Brinker is well positioned to deliver profitable growth over the long term.

With that I’d like to turn the call over to Chuck to share the financial details of the quarter.

Charles M. Sonsteby

Well, we’re certainly in interesting times now with several industries navigating uncharted waters. As Doug said, it continues to highlight why the strategies we’ve been focusing on and implementing over the last year are the right long-term answers for Brinker. We believe we will emerge from this tumultuous time stronger than when we began with an even stronger position in our industry.

While we expected the results of the first quarter to be lower than prior year given the difficult comparisons in media promotion and commodities, clearly we did not anticipate the sequential pressure on the consumer as the quarter unfolded. Accordingly, sales were even weaker than anticipated resulting in lower earnings per share than expected. As you’ll recall, during the first quarter we lapped our successful Honey Chipotle Chicken Crisper promotion that positively impacted prior year traffic trends.

Additionally the considerable rise in commodity prices which consumers in the industry have been experiencing did not begin their sharper acceleration until the second quarter of fiscal 2008. Accordingly, the year-over-year impact of commodity costs in the first quarter was 170 basis points.

As discussed last quarter we continue to see strong inflationary pressures throughout our operating costs including wage rates, utilities, supplies and maintenance costs. While we previously believed we would see a muting of downward economic trends in the first half of calendar 2009. We’re now unsure a change in the trajectory of the economy and the casual dining industry will occur during our fiscal year.

Throughout the first quarter we saw increasing pressures on the consumer as the quarter progressed. As a result we have re-examined our projections for the year and revised them accordingly as noted in our pre-release and today’s press release. Even with this slow start to the year we believe the fundamentals of our business from a strategic, operational and financial aspect are sound.

Chili’s continues to outperform the industry as measured by the NAFTRAC beating the casual dining comp sales growth for the fifth consecutive quarter. The Kickin’ Crispers campaign currently in place is a nice follow up to several of our other culinary hits such as Smokehouse Burger and Burger Bites allowing us to pepper in some flavor and give consumers a reason to spend their dining out dollars at Chili’s.

We began monitoring growth of company-owned restaurants over the past couple years. This slowing in development has allowed us to refocus on our team members as well as capital on our five areas of focus. However with our current financial results, we must be even more prudent with our allocation of capital.

Protecting our balance sheet during this uncertain time, furthering the initiatives outlined in the five areas, and remaining investment grade are priorities for Brinker. Our policy remains to have a high degree of confidence in the findings before we make investments. As always we will read the results on various technology and reimage tests with diligence and apply learnings as business conditions permit.

These actions of slow development, heightened emphasis on balance sheet health and disciplined capital allocation have collectively provided a stable financial base to weather these uncertain times. Currently we project to spend approximately $135 million to $145 million on capital expenditures in fiscal 2009, down $40 million from our previous guidance. We will continue to review and evaluate our planned capital spending to determine if further reductions are warranted.

One of the company’s key strengths is our strong cash flows. Brinker will generate over $380 million in cash from operations during fiscal 2009 even with the lower earnings guidance we released earlier this month and before the sales proceeds for Macaroni Grill. With the lower levels of capital spending just outlined, the resulting free cash flow increases substantially to over $190 million representing a $140 million improvement on a year-over-year basis. This cash flow will provide the necessary flexibility to address current challenges and to drive the business forward to secure our competitive strength.

Last week Moody’s placed Brinker’s credit rating under review for possible downgrade. Just to be clear, at the end of the first quarter of fiscal 2009 and with our lowered forecast we are well within compliance on all debt covenants and believe our ongoing strong cash flows and the strength of our balance sheet are sufficient to support our existing obligations, finance ongoing operations and remain investment grade. It is our plan to use the Macaroni Grill proceeds to pay down debt.

The actions I outlined today with reduced capital spending in fiscal 2009, virtually no company-owned new restaurant development for fiscal 2010, and a continued moratorium on all share repurchase activity will ensure the health of the balance sheet. These actions demonstrate the priority Brinker places on maintaining our investment grade rating and sustaining the overall health of our balance sheet while continuing to put capital in areas that transform our business.

As we turn to the quarter, I’d like to remind you that the results fully incorporate the impact of Macaroni Grill. Where appropriate we’ll call out the results excluding the impact of Macaroni Grill and additionally we remain on track to complete our majority sale of the brand during the second quarter of fiscal 2009.

Let’s begin with the top line. Revenues decreased by 6.7% over prior year or 4.9% excluding Macaroni Grill. The decrease results from both capacity and comparable sales declines of 4.1%.

The capacity decline is attributable to the sale of 76 company-owned restaurants to franchisees and the closures of 49 restaurants of which 27 were Macaroni Grills. Comparable sales decreases were attributable to the sequential pressures facing the consumer as the quarter progressed. As mentioned earlier, we were lapping the successful Honey Chipotle Chicken Crisper promotion in Q1 fiscal year ’08 as well as being impacted by the tightening of consumer spending and the disruption associated with Hurricane Ike. These negative drags on sales were offset by 3.2% price.

Franchise royalty revenues however increased over 30%, up to $16.6 million for the first quarter in fiscal 2009. The improvement was driven by growth in the number of franchise locations versus a year ago along with increased comparable restaurant sales at our international franchise locations of approximately 6%. This was partially offset by comparable restaurant sales decline of approximately 2% at domestic franchise locations. The continued strong sales performance internationally is further evidence of the value of a diversified growth strategy.

The first quarter of fiscal 2009 continued to see an increase in commodity costs compared to the same time period in the prior year. Headwinds were seen in virtually all commodity categories and continued to outpace our price increases. Therefore our cost of sales increased almost 70 basis points to 28.4% for the first quarter of fiscal 2009.

As with many factors in our economy, food commodities defied historical norms in terms of reaction to market factors. Our current projection is for year-over-year variances to ease somewhat for the remainder of fiscal 2009 settling in at percentage levels that are similar to what we saw in fiscal 2008.

Those commodities with contract renewals in the coming months, while at rates that are down from the peak we saw in May and June of this year, are still at rates that are somewhat higher than the rates when these items were contracted a year ago. As a result we would not expect our cost of sales to change appreciably versus what was seen in the third and fourth quarters of fiscal 2008. But overall the longer term cost trends are becoming favorable.

We want to respond to consumers’ current needs for price value while not losing sight on moving our food and beverage excellence initiatives forward for the right long-term solutions that further solidify the differentiated position of the Brinker brands.

Restaurant expenses increased from 57.1% in the first quarter of fiscal 2008 to 58.8% in the first quarter of fiscal 2009. The 170 basis point increase is the cumulative result of many factors with sales deleverage being the biggest single driver.

Increases occurred in almost every major expense category within restaurant expense with utilities which were up 70 basis points, labor and repairs and maintenance accounting for the greatest impacts. In fact utilities and repair and maintenance costs per restaurant were up double digits on a year-over-year basis reflecting strong inflationary pressures on utilities but more importantly Brinker’s focus on making sure our restaurants are properly maintained and retain their relevance with the guests.

Restaurant expense was favorably impacted by lower pre-opening expenses due to opening eight fewer company-owned restaurants in the first quarter of fiscal 2009.

Depreciation and amortization for the quarter declined $3.8 million to $41.2 million for the first quarter of fiscal 2009. The decrease is primarily due to the classification of Macaroni Grill, assets held for sale and restaurant closures and offset by higher amounts being recognized from investments in reimages and technologies.

General and administrative expenses continued to track favorably versus our guidance of flat as a percent of sales. On an absolute dollar basis the spend declined $3.3 million for the quarter due to reduced salary and team member related expenses. Again, decisions put in place over the last year are yielding results allowing us to generate free cash flow for investment in the business during these difficult economic times.

Interest expense declined from $12.9 million in the first quarter of fiscal 2008 to $9 million this quarter due to lower interest rates and lower average borrowings as compared to the same quarter last year. The effective income tax rate was 26.5% down from 28.9% the prior year. The decrease in the tax rate was primarily due to the leverage from FICA tax, tip credits and a decrease in tax expense related to required tax reserves.

Cash flow from operations for the fiscal quarter was $53.4 million, a $39.5 million decrease from prior year due to lower income adjusted for non-cash items but also really driven by a reduction in revenues and incremental margin pressures as well as the timing of operational payments and the sale of 76 company-owned restaurants.

As we look forward to the second quarter and the remainder of the year, there are two important calendar shifts to consider. First, Christmas Day will trade from the second quarter of fiscal 2009 into the third quarter which benefits the second quarter. Also, Easter will trade from the third quarter into the fourth quarter of fiscal 2009 which benefits the third quarter.

As our revised guidance reflects, we expect fiscal 2009 to be a challenging year on many fronts. However we remain optimistic about the long-term prospect of the company and the casual dining industry. We believe this tumultuous time only further underscores the decisions we’ve been making are setting us up for success in the long run and providing us financial stability today to stay the course on our strategies. While the dark clouds are known by all, the silver linings, lower oil, lower interest rates and the declining number of restaurants in the industry offer reasons for long-term optimism.

While it’s a time for uncertainty for some, our path forward is clear. We remain confident in our strategies and actions are taking place to drive those initiatives forward. However the present is not to be ignored. We look for ways to provide dining solutions to today’s guests’ needs and look for ways to capitalize on short-term opportunities and trends. This balance of long-term perspective on decisions complemented with opportunistic short-term actions allow us not just to endure this volatile time but move forward and further drive our long-term value.

Now I’d like to turn the call over to the operator to facilitate the question and answer period.

Can you perhaps give us a little bit of an update on overall franchisee health, perhaps franchisee sentiment, their desire to grow? It seems like you slowed the range of fiscal ’09 openings not just from your company side but franchisees looks like the number has come down as well. I was just looking for some broad-based color.

Charles M. Sonsteby

We did not reduce the amount of openings for franchisees. Most of those would have been in the pipeline for the last 18 months so they’re well underway. We haven’t heard anything specifically from our franchise partners about backing off on development. Remember too, a lot of our development on franchise locations is not just domestic but also international where they’re seeing very good performance and very good returns.

Our domestic franchisees are only seeing about a 2% decline in comp store sales so they’re not really seeing the same kinds of pressures that we do since we’re in so many subprime states. So far we haven’t heard a lot of commentary around development from our franchisees. I know with the way financial markets are out there that that remains a possibility but as of yet we have not seen it. We’ll continue to look at that as we go forward.

Anything to add, Doug?

Douglas H. Brooks

Yes. In some of this growth franchise are some nontraditional locations which are noncompetitive to the corner of Main and Main suburban locations. For instance, in the next couple months we’ll open an airport location in Oakland; we’ll open one in West Palm Beach. We also are starting to expand on college campuses. We opened one last month at the University of Florida. We’re opening one in a couple months at Virginia Commonwealth. In fact we’re even going into an arena here in Dallas in a couple weeks in the American Airlines Center. So there’s still some brand growth and some very nontraditional locations that have very different economic situations than the traditional ones that Chuck was speaking of.

Jeff Bernstein - Barclays Capital

I think your pricing’s currently in the 3% range. I’m just wondering what your own internal studies say in terms of what you think about pricing over the next few quarters or whether you’re going to let most of the pricing lap without any further increases.

Charles M. Sonsteby

We’ll continue to take a look at it in conjunction with where the economy is and what kinds of pressures we see from commodities and other costs. I think to make a statement of what we’re going to do over the next three quarters right now would probably be premature.

Jeff Bernstein - Barclays Capital

A bigger picture question in terms of the portfolio, you guys have said on a number of occasions that you want to stick to a portfolio of brands. I’m just wondering whether there would be any thoughts in terms of further pruning. Obviously now wouldn’t be the best time for it but just wondering, are these the three core brands that you think you’ll make a go of in coming quarters and years or whether you could see possible further pruning as some of the smaller brands are underperforming, even the Chili’s brand?

Douglas H. Brooks

I’d probably answer that similar to the way Chuck answered the pricing question that in this current environment, it’s very tricky. We’re going to continue to evaluate the success of each one of the brands and honestly the overall economic condition, what happens to the competition if other casual dining restaurants go away. That may change the overall environment so we’re going to be very cautious and sort of react to what’s going on around us in the market place.

To follow up on the food cost comments, Chuck it sounds like you expect the cost of sales as a percent of sales to stay pretty much in the range we saw in the first quarter, which I think was pretty close to where it was the second half of last year?

Charles M. Sonsteby

Yes, we do. One of the things that we’re seeing is we contracted items before the big spike that you saw at the beginning of this year and those prices are fairly comparable to what we’re seeing in today’s commodity markets. We really don’t expect to see a big decline as we renew contracts. We expect it to be fairly flat. So we sort of avoided the big spike. But I do believe if you look at where wheat and corn have been over the last month or so, we continue to see downward trends on those commodity costs. While we have not put that in our forecast, we’re still hopeful that that might be a positive that could come through for us.

Joe Buckley - Banc of America Securities

If they do continue to decline, how would that work through the numbers given how contracted you are? I think last call you mentioned you had about 34% of your contracts expiring this quarter, the second quarter?

Marie Perry

Yes, we did. Basically we’re well underway in terms of renegotiating those contracts that are expiring in Q2. To Chuck’s point, really as we’re looking at those contracts the rate that we are seeing is higher than the rate that we contracted for those that we got into about a year ago. Really when you look at our commodity component we’re looking still at about a 4% increase in our bucket of commodities.

Joe Buckley - Banc of America Securities

About a 4% of inflation?

Marie Perry

Yes.

Joe Buckley - Banc of America Securities

Chuck, a question on the cash flow. I think you mentioned free cash flow of about $190 million. Does that include the tax credits from Mac Grill but not the proceeds?

Charles M. Sonsteby

That’s correct.

Joe Buckley - Banc of America Securities

Lastly Chuck, you mentioned I think in your comments about the declining number of restaurants in the industry. I’m curious what you’re seeing out there, if there’s a way that you guys are able to track it? It sort of remains a slippery number for us to track although anecdotally we hear about a number of closures. Do you think the casual dining universe is actually starting to decline in numbers?

Charles M. Sonsteby

Anecdotally we hear about closures from a number of folks that we have in the field. We heard about some closures of TGI Fridays in Phoenix; there was a rumor last night about some restaurants here in Dallas, in Texas and Colorado closing up, which we haven’t confirmed. I’d say most of our information’s more anecdotal than anything we see from any one service as an effective tracker of the number of casual dining restaurants. It’s more about conversations. Doug?

Douglas H. Brooks

I think just operators driving around in the market places where we have restaurants. We’re definitely seeing more close than we are open. Currently that’s probably more mom-and-pops, smaller organizations, and as Chuck said just rumors about more mid-size companies or regional players that are having some real short-term challenges.

Operator

Our next question comes from Steven Kron - Goldman Sachs.

Steven Kron - Goldman Sachs

A couple of questions on free cash flow. First Chuck, to follow up on the numbers and make sure I heard them correctly. You were saying for fiscal ’09 cash flow from operations you’re expecting $380 million and cap ex in the $135 million to $145 million range, so call it $140 million. Just doing the math here, wouldn’t that be free cash flow of around $240 million in the traditional kind of sense?

Charles M. Sonsteby

Yes. We’ve also got dividend payments of about $40 million.

Steven Kron - Goldman Sachs

So you’re backing out the dividend payments. And Chuck, on the cap ex side of things where is that $40 million coming from, the cut? I mean you discussed a couple of different buckets but none of them in isolation seem to be big, whether it’s slowing development in ’09, it seems to only be a couple of units versus prior expectations. Are you slowing materially this remodel campaign? Is that where the majority of this is coming from?

Charles M. Sonsteby

No, not really. We’re keeping on the remodel campaign. Some of it is the technology. We’re allowing it to play itself out. We currently expect to spend all those dollars this year. We’re currently reading the tests and making sure all the technology works in conjunction with each other. We did reduce the number of new restaurants that we were looking at for 2010. That was a portion of it too. Then we just had a bucket of other things, just tightening up some estimates, looking at some retrofits that we were going to put in that also was part of that $40 million.

Steven Kron - Goldman Sachs

You talked about your financial ratios being strong and shoring up the balance sheet and maintaining free cash flow, flexibility important, paying down debt. Given that you guys talked about the Moody’s watch, what are your discussions currently with the rating agencies and what would the implications be to your interest expense line should there be a downgrade?

Douglas H. Brooks

Moody’s is going to come in and talk to us. We just haven’t had a face-to-face meeting with them in some time. This move was more to facilitate that or as part of that but they’re going to come down and talk to us and we’ll go through what we have as an outlook as the year as well as our capital spending plan.

In terms of what would it cost, a downgrade from Moody’s doesn’t have any immediate impact on us. If we got downgraded from both Moody’s and Standard & Poor’s, that would impact our interest expense. But right now I still think when you look at where we are through 2009 and what we look like through 2010, we’re still an investment grade company. We believe that when we sit down with them they’ll come up with that same conclusion.

Steven Kron - Goldman Sachs

On the Chili’s sales front, if I recall I think you guys in September were maybe on-air more so than you were last year. If I have that correct, how are you guys finding the use of media right now given the current environment and what are your expectations going forward on on-air versus off-air? Are you getting the desired response?

Douglas H. Brooks

We were on-air this September and we weren’t last year other than we did some media things for the St. Jude promotion in 2008. We’ve had good success through fiscal 2008 with most of our media but September is the first time we saw it not work as effectively. We’re still evaluating the consumer, what’s going on in the market, and our options and the items that we’ll put on the menu. But September was probably the first time that we didn’t see the movement that we normally see.

Charles M. Sonsteby

I think one of the things to remember is we put the investment against To-Go which is a small part of our business. So we were using it at a time when families are going back to school, everybody’s getting into a different routine to try and see if we couldn’t push that part of the business. I think that was an investment over the longer term. If you go back in the quarter, I know we had the Create Your Own Fajitas. We found that that was maybe at a price point that was a little bit higher than what consumers were looking for so we replaced that rather quickly with burgers and bites coming back in with that. That helped us recover a little bit from a slow July.

All-in-all if you look at our spending year-over-year we expect to have about three more weeks of advertising this year over last year. We’re spending more on advertising expense this year versus last year as a percent of sales. We haven’t backed off as of yet.

Operator

Our next question comes from David Palmer - UBS Securities LLC.

David Palmer - UBS Securities LLC

It appears from some data that I’ve seen that the casual dining industry has had deteriorating trends at lunch. Are you seeing that in your business at Chili’s? Is this becoming a little bit of a source of increasing deleverage?

Charles M. Sonsteby

Yes. I hadn’t noticed necessarily where we were on lunch. Let me take a look and see if I can’t pull that out. We put in the [inaudible] lunch at Chili’s which was an intent really to kind of pick up that lunch business. In terms of year-over-year we are seeing lunch sales down but not necessarily more at lunch than dinner. We’re really seeing more weakness in weekday dinner. That’s really where we’re seeing softness. It could have been helped by the Bottomless Express Lunch.

David Palmer - UBS Securities LLC

I think you are probably killing your competitors on a relative basis on that day part.

Douglas H. Brooks

I think some of the research we’ve also seen and some conversation is that some families are still going out on the weekends but during these tough economic times have backed off on their midweek dinners. I think that’s part of what’s showing up in the data Chuck just looked at.

David Palmer - UBS Securities LLC

That makes me wonder that might be kind of a second follow up on that. As you see some of these food costs roll off, some of the worst of the inflation away from hamburger, you might see some of the major change particularly those that might be a little bit lower AUV than you and a little bit more desperate might try to do some things promotion-wise to kind of reinvest some of the savings back to shore up some of these like the weekday dinner for instance to get people back in the door. Are you concerned that there might be kind of a wave from one last super nova of the irrational behavior this next year?

Douglas H. Brooks

I think when the consumer is pressed as hard as they are right now, we’ve already seen some folks come out with some price points, all-you-can-eat sort of limited promotional things and I guess as always we want to kind of balance the short term and long term. Particularly at Chili’s it’s always been a brand known for great value and a lower average ticket price than most of its competitors.

We believe as strongly as ever that in casual dining, value is still part of the total experience. If you look at four of our five areas of focus, the hospitality is training, the food and beverage excellence is the quality, it’s the flavor profile, the atmosphere of the building, the remodels, the pace and convenience is more of the time.

Sure price matters and we have done some things; as we just mentioned, the Bottomless Express Lunch. We’ve actually put a lunch panel on the back of the Chili’s menu for the first time of the brand history to highlight lower cost items. We’ve added a Sweet Shot dessert less than $2, smaller portion. So there’s a number of things we have done and the other brands maybe even stronger. At Macaroni Grill we’ve got the Chef Trio dinner, the duo combos at lunch, great value at lower prices. On The Border ran the Endless Enchiladas during part of last year.

The single super nova one-time low price is a little bit probably more in the category of limited time promotions that did not leave such a great taste in our mouth. We’d rather work on all the basics of casual dining and offer good value, price as well as the experience.

I wanted to get a little clarification on the franchise royalties this quarter of $16.6 million. Can you break that down as to what was royalties and what was fees and then what it would have been excluding Macaroni Grill as well?

Douglas H. Brooks

Guy, do you want to take that one?

Guy Constant

In terms of one-time fees, very small because as you know we haven’t been doing a lot of franchise transactions in the past few months somewhat driven by what’s been going on in the credit market. The vast majority of that was just simply the royalties we’re seeing from the ongoing sales from franchisees domestically. Mac Grill is not significantly franchised so there’s really not a lot of revenue in there from Mac Grill franchise transactions. That’s almost purely Chili’s and OTB franchise royalty dollars.

[Bob Ruddington] - KeyBanc Capital Markets

Would Macaroni Grill be below $1 million then?

Guy Constant

I don’t have that number off hand but my estimate would be yes, likely it would be below $1 million.

[Bob Ruddington] - KeyBanc Capital Markets

You said the reimages are providing a mid-single-digit boost in traffic. I just wanted to confirm that’s traffic and not same-store sales?

Guy Constant

The numbers that we’re seeing is that the lift is in traffic but we’re not seeing the same sort of spread. I don’t have the reason why that isn’t in front of me between traffic and sales that we’re seeing at other locations, but to clarify the phraseology, it would be a mid-single-digit boost in traffic.

[Bob Ruddington] - KeyBanc Capital Markets

On franchise openings that you’re expecting this year, we feel those are safe since the pipeline is so far out, correct?

My first question relates to the labor costs. Do you think the deleverage that occurred during the quarter related to an abrupt change in the guest count trends or is this something that we’re seeing back of the house labor becoming just more fixed as you kind of lap multiple years of declining guest counts?

Charles M. Sonsteby

We’re seeing a little bit of both. Our productivity was off just because we couldn’t respond or didn’t respond quickly enough to being below our sales expectations. Having said that, I think we’ve done a really nice job operationally keeping what we call some labor scheduling we’ve done a pretty good job against productivity but we were down year-over-year on productivity related to just not being able to adapt quick enough. We are seeing back of the house labor up on a year-over-year basis. That is something that will be hard to tamp down. I think that’s something that becomes more an element of a fixed cost that’s put into the equation.

Chris O’Cull - SunTrust Robinson Humphrey

Can you help quantify in terms of just the abrupt change we saw in guest counts during the quarter, maybe what kind of implications that could have had to the margin during the quarter?

Charles M. Sonsteby

I think we fell below what our expectation was. When we were looking at the quarter, I think street estimates were always a little high on what we expected to do for the quarter. We were pretty much on track until September and then September was really weaker. There’s so many things happened in September related to the two hurricanes that hit, definitely the credit market impact started in earnest in September, so I think there were a number of items that really did affect the sales fall off.

Chris O’Cull - SunTrust Robinson Humphrey

I know historically the industry or casual dining at least has not utilized value as a primary offering during the holidays but in light of the environment, do you think we’ll see more value oriented offerings as a primary promotion from casual diners during the holiday season?

Charles M. Sonsteby

I think it’s possible. Doug, do you want to answer that?

Douglas H. Brooks

Yes, I think so. We’re already seeing some of the casual dining operators as well as all parts in the restaurant industry. Everybody’s trying to get the guests attention with a low-price, I guess in the grocery stores they might call it a loss leader to get people to show up and then hopefully sell them something different. But I don’t think there’s any question.

Charles M. Sonsteby

That’s where you get into brand loyalty and how many people really are out there chasing $0.50 or $1.00 difference on a check. That’s going to end up being the real question for the industry.

Chris O’Cull - SunTrust Robinson Humphrey

Chuck, does the company have any debt commitments that need to be renewed in fiscal ’09?

Charles M. Sonsteby

We do have a bank line revolver that we are going to renew here within the next few months.

Operator

Our next question comes from [Tom Fortay - Belleview Advisory Group].

[Tom Fortay - Belleview Advisory Group]

You had talked about for fiscal 2010 at this point in time stopping the company-owned new unit growth. From a long-term perspective when you think about your ownership mix, company-owned versus franchise, how you look at Chili’s today and On The Border?

Charles M. Sonsteby

We said that we’d have virtually none but we still may have a couple openings there, relocations, etc. We feel very good about where they’re located. I think as we look at it over the longer term what percentage mix between company to franchise, certainly today there’s not the ability to go out and sell restaurants to franchise partners in any big sense or doing any kind of significant deal because of the unavailability of credit. I think as we look at it today it might be a little bit different than the way we might look at it a year from now or six months from now.

[Tom Fortay - Belleview Advisory Group]

You talked a little in your opening comments about starting to see some benefit from lower gas prices. Could you provide a little more details on that?

Charles M. Sonsteby

People who have a job today and start to feel a little bit more secure about where their job is start to see lower gasoline prices, lower home heating oil, but those things might end up being positives for the consumer over a little bit of time. What we’ve normally seen in our industry, and again I don’t want to typify this as anything that’s been totally normal, but after 9/11 when the Iraq war started you see people immediately pull back from what their normal routines are. It’s taken folks about 60 to 90 days to get back into a routine.

Again we saw a lot of this contraction, a lot of consumer confidence decline start in September, continue through October and we’re hopeful that we’ll sort of see the same kind of cycle play itself out. But we do have some things that may help that play out; gas prices, interest rates, home heating oil. Those are the kinds of things that we’re hoping the consumer might see and then gain a little more confidence that those who have a job still will have a job.

Do we have that baked into our forecast? No. But I think those are some of the things that people aren’t talking about. Right now everyone seems to be talking about all the negatives, and we’re hopeful that some positives might start to take root.

[Tom Fortay - Belleview Advisory Group]

I was hoping you can give a little more detail on the regional trends; for example, the California and Florida restaurants.

Charles M. Sonsteby

California and Florida remain difficult as well as Arizona and Nevada. Those are markets that have been hit by subprime. Basically sales were doing pretty well through June and then we saw them fall down by about 9% difference as we started getting into July, about a 9% difference between June and July. Florida and California still remain soft.

Operator

Our next question comes from John Glass - Morgan Stanley.

John Glass - Morgan Stanley

On the Mac Grill sale, what are the remaining conditions for closing? Is there a potential that the buyer can renegotiate or is there an out based on market conditions for example?

Charles M. Sonsteby

The customary conditions that we face are landlord consents, getting liquor licenses transferred, and they’re also doing a sale leaseback so they’ve been going through and doing title searches and environmentals. Those are all the things that are currently being done and we feel like we’re making very good progress on that and feel like we can still get to the end date.

John Glass - Morgan Stanley

So there’s nothing explicitly that says they can renegotiate? Have you had conversations with them about renegotiating the price given the market conditions?

Charles M. Sonsteby

No, we haven’t. And John, I don’t want you bringing that up. I don’t want you giving anybody ideas.

John Glass - Morgan Stanley

Hopefully they were smart enough to have thought about it.

Charles M. Sonsteby

[Inaudible] but I think again Macaroni Grill’s remained on plan so Macaroni Grill’s performing as we had expected and they had expected them to perform. So we don’t feel like there’s any opportunity to use anything like that as a lever.

John Glass - Morgan Stanley

Going back to the question about cost cutting, in 2007 you experienced negative 2% to 3% comps but you actually grew net income that year despite that adversity. I understand food costs are more this time around but what else is different that you’re not experiencing so much more deleveraging in your business on effectively the same range or at least the lower end of the range of the comps? If you just walk through, have you already cut the G&A that you are going to cut in that process and there’s not a lot more or maybe if there’s another opportunity, what is it? Same thing with store level labor? Is there just no more of the labor in the store?

Charles M. Sonsteby

I think that’s a little of it too, but also we’ve got restaurants that we invested more heavily in and were more expensive generating the same kinds of volumes. If you looked at a few years ago, the restaurants we had open cost significantly less. The ones we’ve opened in the last couple years were $3 million investments or $2.8 million investments, and with those doing lower sales we get to a deleverage because of fixed costs on those newer restaurants.

Anybody else have anything they want to add?

Douglas H. Brooks

Utilities I think and that’s a new line item that’s really impacted us related back to the price of oil. So again long term maybe that’ll get more in line, but if you look back over the last six months or so that’s been an issue.

Charles M. Sonsteby

Yes. Year-over-year utility costs are up 70 basis points, which is huge. We would hope that we’d start to get a little bit of a benefit from that on our own P&L as we go back through the next year.

John Glass - Morgan Stanley

Any color commentary in October? It would seem that the market, the news flow, the election, all those things got amplified substantially in October and anecdotally I’ve heard that therefore sales at least at other companies have been materially worse than September. Without maybe even putting a fine point on it, is that a fair statement?

Douglas H. Brooks

I hesitate to paint the industry any way and really don’t want to get into a lot of guidance, but I think again there hasn’t been a reason for the consumer to come out of their hole. Until people kind of settle down a little bit, as we said we normally see these last 60 to 90 days. So we’re not in a period where we would have expected things to really get turned around yet.

Charles M. Sonsteby

I’d say too, the presidential election, just the beat down of bad news; this morning I heard some newscasters talking about the price of gas being under $3 a gallon and they actually had a smile on their face. I just think the consumer’s plight is a lot real but part of it also is just environmentally you can’t turn on the TV or open the paper or listen to the radio or turn on your computer without just getting reminded of how bad it is. So with the election behind us in November, at least there’ll be less talk about it and with some of the short-term trends we’ve seen with the price of oil we will see some improvements real and imagined.

Doug, in your open remarks you talked about the international business softening. It sounded like same-store sales were still pretty strong. Could you talk about what parts of the world you’re seeing softness and relative to the size of that business to Brinker, I was kind of surprised you focused so much on it?

Douglas H. Brooks

I really wasn’t talking about sales. I was just talking about the economic environment starting to make news in those market places. In Mexico you’re hearing about the peso; the cost of food products in other countries where we have restaurants. It’s a pretty global market place now so some of the things that have been going on here for the past six months they are starting to enter into more of the cost environment and just economic landscape of those countries. Top line is still great and overall if you look at cost of land, cost of people, cost of food; it ‘s much better and much less competitive. Just things we’re watching. The top line sales are still great in most of the markets around the world.

Joe Buckley - Banc of America Securities

Going back to a couple of John’s questions on the sales numbers, was the September comp materially worse than July and August?

Charles M. Sonsteby

No, but we had expected it to be better.

Joe Buckley - Banc of America Securities

So it was more versus expectations than seeing a substantial fall off in terms of the rate of comp decline?

Charles M. Sonsteby

Yes. It was down about 100 to 150 basis points sequentially and we had expected it to be better than August.

Operator

That was our last question. Do you have any closing comments you’d like to finish with?

Marie Perry

Yes. We just want to thank everyone for joining us today. This concludes the earnings call and the Q&A session. We look forward to talking to everyone again to go over the second quarter fiscal 2009 in a few months. Thank you so much.

Operator

Ladies and Gentlemen, this does conclude today’s conference call. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.

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